When the Chancellor announced the new dividend tax, we ran some immediate calculations to compare the tax implications for directors’ remuneration. Would a pay package weighted towards dividends still be the most tax-efficient? Or should directors move to a more salary-based remuneration strategy?
Our Dividends vs Salary blog showed that a low dividends / high salary option remains the most attractive. But there’s going to be a very real impact on directors’ take home pay.
The dividend tax will be introduced on 6 April 2016, affecting dividend payments made within the 2016/2017 tax year.
The first £5,000 of dividends will be tax free. Once this threshold is reached, dividends will be taxed at an additional 7.5% for all tax payers.
£50,000 annual dividend – will be taxed at an additional £2,527
£100,000 annual dividend – will be taxed at an additional £5,267
£200,000 annual dividend – will be taxed at an additional £13,417
So what can you do? The answer in the long-term is, unfortunately, not a lot. If you are approaching retirement – and can afford a smaller take-home amount – then it makes sense, from a tax perspective, to divert some of the planned dividend income towards your company pension.
Before paying a dividend early, there are a number of things you need to consider:
Is there enough cash in the company?
Are there sufficient distributable reserves?
Will paying dividends early affect any other aspects, such as inheritance tax planning?
How will your credit rating be affected if you clear out your balance sheet to make an early payment?
Make sure your bookkeeping and accounts are up to date so that you can make a sensible decision. Talk to your accountants well before the end of the tax year so you have a clear picture of your company’s financial position and assess whether or not it is possible to bring forward some of next year’s dividend payments into the current financial year.